Cato and the Kochs have come to an agreement which we are hopeful preserves the integrity and independence of the Institute. Here is Cato’s official press release describing the settlement:

The Cato Institute and its shareholders have reached an agreement in principle that would resolve pending lawsuits filed by Charles Koch and David Koch against Cato, its CEO, and several of its directors.

Under terms of the agreement, Cato will no longer be a stockholder corporation and John Allison (the former CEO of BB&T) will be replacing Ed Crane, who will be retiring as Cato’s CEO. That represents a compromise by which both sides will achieve key objectives. For a majority of Cato’s directors, the agreement confirms Cato’s independence and ensures that Cato is not viewed as controlled by the Kochs. For Charles Koch and David Koch, the agreement helps ensure that Cato will be a principled organization that is effective in advancing a free society.

Earlier this year, Charles Koch and David Koch filed two separate lawsuits seeking interpretation and enforcement of Cato’s shareholders’ agreement. Prior to October 2011, Cato was owned by four shareholders — Crane, Charles Koch, David Koch, and William Niskanen. After Niskanen’s death in October 2011, the Kochs maintained that the shareholders’ agreement left Cato with three remaining shareholders (the Kochs and Crane). Crane and Niskanen’s widow, Kathryn Washburn, challenged the shareholders’ agreement and maintained that Ms. Washburn was the rightful owner of Niskanen’s shares.

The parties will seek a stay of the court proceedings related to that dispute after formal settlement documents have been prepared and signed. Terms of the settlement include:

The Cato Institute will be governed by members rather than shareholders. The members will be the directors of the Institute and will elect their own successors. Initially, the Board will include 12 long-term Cato directors, including David Koch. They will be joined by three other Koch designees and Allison, who has the option to nominate one or two additional directors. Charles Koch, Crane, and Washburn will not be on the Board.

Crane, who co-founded the Institute with Charles Koch and served as its CEO for 35 years, will retire within six months. He will be succeeded by Allison, an expert on political philosophy and public policy and a revered libertarian, admired and respected by the Kochs and the Cato Board.

Crane will work with Allison during the transition period and then serve as a consultant on fundraising and other matters.

On announcing the agreement in principle, Cato chairman Bob Levy said: “This is the end of an era at Cato. From the Institute’s inception, Ed Crane has played an indispensable role — co-founding, managing and shaping it into one of the nation’s leading research organizations.”

Crane extended his gratitude to Cato’s employees, directors, and donors for their ongoing support. He welcomed Allison, whom he described as “a great champion of liberty and an outstanding choice to build on Cato’s success as the foremost non-partisan, non-aligned, independent source of libertarian perspectives on public policy.”

Allison said he was “happy to assist in resolving the pending litigation and related issues,” and affirmed that his goal is “to sustain Cato’s efforts at moving the country toward a freer and more prosperous society.”

Charles Koch applauded the agreement. “I have every confidence that John’s leadership will enable Cato to reach new levels of effectiveness. The alarming increase in the size and scope of government is undermining freedom, opportunity and prosperity for all. Effective action is required to limit government to its proper role.”

In this video, Cato chairman Bob Levy offers additional details about the deal and what it means for the future of Cato.

Cato has worked closely with advocates of limited government throughout Latin America during the past several decades, a period that has seen the burgeoning of think tanks committed to promoting free societies. Some 30 think tank leaders in the region have signed an open letter to Cato President Ed Crane and board members in support of an independent Cato. A translation of their letter is below:

Edward Crane and Members of the Board of Directors
Cato Institute
Washington, D.C.

We, the heads of think tanks throughout Latin America, wish to express our respect, admiration and appreciation for the work that the Cato Institute does in our region in defense of the principles of free markets, limited government and peace.

The support we receive from the Cato Institute through its experts, its publications, the seminars for students that it hosts in our countries, its Spanish-language website (elcato.org), the Economic Freedom of the World report of the Fraser Institute that Cato co-publishes in Spanish every year, the distribution of op-eds in the region’s most prominent newspapers, and the immediate response to any of our requests for assistance are evidence of the Cato Institute’s tireless work to create free and prosperous societies in Latin America.

At this time when the Cato Institute is experiencing a threat to its independence, we hope that everything is resolved in the best way possible, and to the benefit of those of us who closely follow the institute and its important work around the world.

We would be pleased to share with you how the contributions of the Cato Institute have benefited our work in pursuing free markets in Latin America.

Anytime anyone says anything libertarian, spit on them. Libertarians are by definition enemies of the state: they are against promoting American citizens’ general welfare and against policies that create a perfect union. Like Communists before them, they are actively subverting the Constitution and the American Dream, and replacing it with a Kleptocratic Nightmare.

So when Ames argues that any talk about Cato’s “principled opposition to the Bush administration’s imperial presidency” amounts to spinning “fairytales,” let’s stipulate that he approaches his analysis of Cato’s work with a somewhat distinct perspective.

Still, his motives don’t matter if his case holds up. Let’s look at that case.

In the course of his argument, Ames squeezes out a grudging rabbit pellet of a concession, admitting that “it’s true that compared to other pro-Republican think-tanks, Cato did have periods when it was critical of Bush’s wars and attacks on civil liberties.”

And in 2006, Cato released the white paper “Power Surge: The Constitutional Record of George W. Bush,” coauthored by Tim Lynch and myself, warning that “far from defending the Constitution, President Bush has repeatedly sought to strip out the limits the document places on federal power,” and has insisted that he “cannot be restrained, through validly enacted statutes, from pursuing any tactic he believes to be effective in the war on terror.”

…the Cato report is so compelling because it hews so closely to the basic critique made by Representative John Conyers…. In words that might spill from the mouth of Cindy Sheehan or Scott Ritter, Cato concludes that we now have “a president who can launch wars at will, and who cannot be restrained from ordering the commission of war crimes.”

Thanks! (I think).

Still, Ames complains that Cato wussed out sometime in 2005, when the Institute “suddenly called a halt to its growing criticisms of Bush’s War on Terror.”

I don’t think I knew that “Dr. Yes” was on the CSCR board when I started attacking his handiwork. I do know we later took Yoo off the board because his views are (to put it mildly) incompatible with ours.

“Another Cato executive, Ted Galen Carpenter, former VP for Defense and Foreign Policy Studies, enthusiastically supported Bush’s war on terror and called on Bush to invade Pakistan.”

I don’t read the 2002 column Ames links to as a demand that the US “invade Pakistan,” as opposed to mounting airstrikes and cross-border raids against Al Qaeda cells. Regardless, the implication that Ted Carpenter’s an “enthusiastic” hawk is hardly a fair-minded summary of Carpenter’s career, which is marked by steady advocacy of diplomacy, realism, and, as the title of his 2002 book puts it, Peace and Freedom: Foreign Policy for a Constitutional Republic.

Ah, yes: it’s the old Norm Ornstein trick I mentioned above. Radley Balko addressed this one on Reason’s blog, shortly after Pilon’s WSJ oped was published:

Ed Crane and board member Bob Levy have co-written an op-ed entitled, “No, a President Can’t Do as He Pleases,” which sounds quite a bit like a scolding of fellow Catoite Roger Pilon for his recent op-ed in the Wall Street Journal.

Much as I disagree with Pilon’s op-ed (disclosure, I’m a former Cato employee), it seems to me that this is the proper response. Cato is of course a libertarian think tank. But my experience there was that within that framework, there is quite a bit of intellectual freedom. A common refrain there has always been that “there is no official Cato position, only positions held by Cato scholars.” Crane didn’t fire or publicly discipline Pilon for apostasy. Rather, he took up a pen himself, and wrote a piece that, along with Tim Lee’s rebuttal and Gene Healy’s forthcoming book, makes it pretty clear that Pilon’s position on executive power isn’t one held by many others at Cato.

It’s not the easiest thing to make the case for civil liberties and restrained foreign policy in an atmosphere of war fever, with even most of the liberals jumping ship. But if you ride it out, you may find that people eventually acknowledge that you were right.

As Radley suggests, there was and is no “official Cato position” on any given military action or constitutional claim associated with the War on Terror. But there was and is a dominant position. Here are a couple of links cataloging our civil liberties and foreign policy work over the years. Take a look and judge for yourself.

I think the evidence shows that we’ve been a far more consistent opponent of Washington’s crackbrained foreign interventions–and the civil liberties abuses that accompany them–than any other major think tank in town. Who’s done better: the BrookingsInstitution? The Center for AmericanProgress?

Cato’s not perfect. But in this fallen world, in this sinful company town, I’d say we’ve done alright.

Over the past several weeks, Cato staffers and friendsoftheInstitute have explained with conviction and clarity the importance of maintaining Cato’s independence. In contrast, the Kochs’ shifting rationales for their takeover attempt have tended to confuse rather than clarify. Over on the Save Cato page, the Cato Institute has just posted the following “Ten Questions for the Kochs,” which, if answered, could help clear up confusion about what it is they hope to achieve here:

Statement, March 2011, from David Koch: Cato is “viewed as one of the nation’s foremost upholders of advancing the idea of liberty. I am proud of and believe Cato’s success has been due to its outstanding leadership, including various groups of accomplished board members who have brought a diverse set of views and experiences to advance Cato’s vision.”Statement, March 2012, from David Koch: Cato “is not nearly as effective as it could be. This is, in large part, due to the behavior and management practices of its CEO …. [T]he current Cato board has allowed this behavior …. Having a board in thrall of the CEO has been the downfall of many nonprofits. … [Ed Crane] should be replaced as soon as possible – preferably within six to eight weeks.”

What acts or events triggered your move to take control of the Cato Institute, which you praise as “one of the nation’s foremost upholders of advancing the idea of liberty”?

Why applaud Cato’s “outstanding leadership” while insisting its CEO be replaced in “six to eight weeks”? Why commend Cato’s “accomplished board members” for bringing “a diverse set of views and experiences to advance Cato’s vision,” and then remove four directors?

Cato’s board, before you altered its composition, comprised civic and business leaders who donated more than $30 million to the Institute. Those same persons determined the CEO’s compensation and his tenure in that position. Is that a board “in thrall of the CEO” or vice versa?

Cato’s criteria for board members include: (a) no dependence on the Institute, management, or shareholders; (b) commitment to libertarian principles; and (c) willingness and ability to generate significant financial support. You were not happy with the Institute’s choice of directors. Which of the selection criteria would you change or delete?

Virtually all your appointees and nominees for Cato’s board are not libertarians, had not previously expressed interest in the Institute, are political activists, and serve you in order to promote the Koch corporate and political agenda. Is that the type of independent director that furthers our mission?

You have written, “Our hope is that the commitment to advancing a free society will become Cato’s overriding agenda.” What do you believe is currently Cato’s overriding agenda? If it does not advance a free society, why then are you “proud of … Cato’s success”?

On March 1, after filing a lawsuit seeking control of Cato, you said your purpose was “to ensure that Cato stays true to its fundamental principles.” What are those principles? How has Cato not been true to them?

You profess concern about the damaging impact of media reports. Why did you instigate the public relations campaign by orchestrating an exclusive story about your lawsuit in Politico?

Why are you engaged in a takeover attempt that will grievously injure the movement for individual liberty that you endorse? What specifically has Cato not done that you want it to do? What has it done that you would like it not to do?

How could an Institute “owned” by the Kochs, whose board is appointed by the Kochs, be viewed as a credible source of non-partisan, non-aligned, independent commentary on vital public policy questions?

Both Charles and David Koch hotly deny that they harbor such intent, although the views of some members they have sought to put on Cato’s board certainly seem to validate those fears. But the prospect of the Institute becoming a partisan shop (or the parallel scenario that scholars who refused to toe the conservative GOP ideological line would be quickly purged) is not the primary danger. Such an ugly outcome cannot be cavalierly dismissed, but the more probable danger is more subtle.

Charles Koch and his right-hand associate, Richard Fink, have long advocated the concept of “market-based management.” Indeed, Koch wrote a book on the topic. The specifics of the concept have often proved elusive, and critics have made withering criticisms of that lack of clarity. But the basic feature seems to be that organizational leaders should tailor their approaches based on feedback from their audience. Ideally, that feedback gives useful information about whether a strategy is working or whether it should be adjusted or abandoned.

That approach makes sense for an organization in the private sector where success or failure can be determined on the bottom line each quarter. It even makes sense for activist organizations in the nonprofit arena where success can be measured (e.g., number of candidates elected, number and importance of legislative measures passed or defeated) with some precision—again over the relatively short term.

But such an approach is dangerously corrosive for a think tank. It creates both an activist bias and a demand for short-term results.

That is not how an effective, respected think tank should or even can operate. Cato scholars have taken positions and built compelling intellectual cases on behalf of a host of issues. Often, there was no chance that the position advocated would be adopted in the foreseeable future. Those scholars nevertheless persisted in their efforts for three reasons. One, the policy was correct on the merits; two, over the long term there was a significant chance of success; and three, moving policy toward the proper outcome on one set of issues furthered the goal of changing the entire paradigm about government’s proper role in our society.

Generating the needed critical mass of support for changing policies that have been entrenched for decades often requires the patience of Job. Cato scholars began to advocate private Social Security Accounts more than three decades ago, for example, but it wasn’t until the administration of George W. Bush that the option became a prominent part of the political debate.

Likewise, several colleagues and I have labored over the same period to make the case against the futile, counterproductive war on drugs. Change on that front has been agonizingly slow. But in the mid and late 1990s, states began to pass medical marijuana laws and decriminalize possession of small quantities of drugs. Over the past decade, several countries, most notably Portugal and Argentina, have adopted significant drug policy reforms. And in the past three years, a growing roster of prominent opinion leaders, including two former presidents of Mexico, the former presidents of Honduras, and Brazil, televangelist Pat Robertson, and Pope Benedict have expressed opposition to the war on drugs. A Gallup poll in the autumn of 2011 showed 50 percent of Americans now favored the legalization of marijuana—nearly double the percentage in the early 1980s.

It would be unwarranted to argue that the work by Cato scholars was entirely responsible for such a sea change in attitudes regarding drug policy. But the several books, dozens of policy studies and journal articles, and hundreds of newspaper op-eds, magazine articles, blog posts, and media interviews undoubtedly played a role.

It would have been difficult to justify such a long-term commitment (with few visible signs of success in the early years) under the concept of market-based management. But it is a strategy that is now beginning to pay dividends—and holds the promise of making a huge, beneficial change in public policy on a crucial issue.

The mission of a think tank to drastically alter (not just tweak) entrenched policies is akin to trying to turn around an aircraft carrier that is headed in the wrong direction. The Koch market-based management strategy is akin to turning around a nimble speed boat. Cato’s current management team, headed by Ed Crane, understands that important distinction and wishes to keep Cato focused on the former, ultimately more important, orientation. A Koch-appointed board would, even with the best of intentions, almost certainly want Cato to adopt the latter approach. That would be a loss for Cato, the public policy debate, and the cause of liberty.

Ted Galen Carpenter, a senior fellow at the Cato Institute, is the author of eight books and more than 500 articles and policy studies. His books include Bad Neighbor Policy: Washington’s Futile War on Drugs in Latin America (2003) and The Fire Next Door: Mexico’s Drug Violence and the Danger to America (forthcoming, September 2012.)

John Blundell is one of the most successful and highly respected libertarian executives in the world. From 1993-2009, he was the CEO of London’s highly influential Institute for Economic Affairs (IEA).

In a recent email to my colleague David Boaz (excerpted here with Blundell’s permission), Blundell had this to say about the Kochs’ attempt to take over the Cato Institute:

I grew up above a shop and my mom used to say there are three secrets to success, namely location, location, location.

My elder son is now Director of Golf Operations at a major resort and he tells me that there are three secrets to success, namely drainage, drainage, drainage.

And in the time I worked with the late Sir Antony Fisher – that great think tank pioneer – he used to tell me that there are three secrets to success, namely independence, independence, independence.

Blundell’s long-standing ties to the Koch brothers and their various political operations does not blind him to what should be perfectly obvious to everyone: a think tank that is the personal property of two men is not a recipe for success no matter how well intentioned said men might be.

Back in February, you may remember, the Koch brothers nominated 12 new members to the Cato board of directors in advance of a shareholders meeting that was, in point of fact, required by the stipulations of the shareholder agreement. They only had the votes, however, to put four of those nominees on the board. So at the March 1 meeting, they rammed through Charles Koch, Preston Marshall, Andrew Napolitano, and Ted Olson, and in the course of doing so, displaced four long-standing members of the Cato board; John Malone, Don Smith, Bill Dunn, and Lew Randall. Hence, a fair description of what happened is that the Kochs had four incumbent board members removed, two of whom happened to be the largest donors to the Cato Institute.

Melissa Cohlmia, director of corporate communication at Koch Companies Public Sector, responded that the Washington Post was incorrect in saying that Charles Koch and David Koch had four members “removed.” She said the Kochs requested that the vote on the board members be delayed. When that didn’t happen, the Kochs voted to retain two of the four board members

They did? Well, yes and no … but mostly, no. The Kochs’ support for two of the four ousted board members is a convenient fiction.

First, a little background: from the inception of the Cato Institute through 2010, board members were chosen by board members. Cato was, functionally, governed by a self-perpetuating board like almost all other non-profits. But Cato’s shareholder agreement gave the shareholders the power to elect board members if they chose. Prior to 2010, the shareholders had only met once (in 1981 to buy-out Murray Rothbard) and had never exercised their power to elect board members. In 2010, however, the Koch brothers insisted on exercising their long-dormant shareholder power and imposed two new members onto the Cato Board (Koch employees Kevin Gentry and Nancy Pfotenhauer). In 2012, they did so again, but this time, they went all-in and put four new members onto the Cato board.

The Cato shareholder arrangement allows for cumulative voting. Crane and Washburn hold 50 percent of the shares, so they got to fill half of the board seats up for the vote. Charles and David Koch hold the other 50 percent of the shares, so they got to elect the other half. When the shareholder meeting convened on March 1, there were eight seats up for grabs. Each of the four shareholders owned 16 shares, so each shareholder was afforded 128 votes (16 [shares] x 8 [board vacancies] = 128 votes) and those votes could be allocated any way the shareholder wished. The total number of votes cast on March 1 was thus 512; 256 by Crane-Washburn and 256 by Koch-Koch.

To be assured of election on March 1, a candidate for the board needed 57 votes (8 seats x 57 votes = 456 total votes, so the 9th highest candidate would have 512 – 456 = 56 votes; not enough to get into the top eight). Thus, to elect their four candidates, Koch-Koch gave each of them (Charles Koch, Marshall, Napolitano, and Olson) 57 votes, or 228 of their 256 total votes. Crane-Washburn did the same, electing Washburn, Jeff Yass, Howie Rich, and Fred Young with 228 of their 256 total votes.

The point here is that it did not matter who received the “extra” 28 votes from each side. Even if Crane-Washburn and Koch-Koch voted for the same 9th candidate, he would only have received 56 votes; not enough to be elected.

The Kochs apparently chose to use their meaningless 28 votes on Malone and Smith so that they could say “Hey, don’t blame us for displacing Cato’s two largest donors; we voted for them!” Their lack of enthusiasm for Malone and Smith, however, was made abundantly clear when the newly-constituted Cato board met on March 22 and voted to expand its membership from 16 to 20 so as to put Malone and Smith (along with Dunn and Randall) back on the board. The Kochs responded with yet another lawsuit on April 9, claiming that there was “no compelling justification” for expanding the board so as to include Malone and Smith. That tells you all you need to know about how genuine their support for Malone and Smith was at that March 1 shareholders meeting.